The Cause of the Economic Crisis of 2008
Two thousand eight found the American economy in turmoil. The housing market made a dramatic incline which caused an increase in foreclosures. The major investment banks took a huge fall and the stock markets fare no better either. These were events that leaded up to the economic crisis of 2008. There were three major government incentives that were implemented; the Housing and Urban Development policy, Reinvestment Act, and the Federal’s low interest rate policy. These were the incentives that the government provided that ultimately caused the economic crisis of 2008.
During the mid-1900s the government set up regulations to help Americans own homes and this made it possible for lenders to lend money to everyone, regardless of income. This was the American dream that people work so hard for. ...view middle of the document...
Then there was the Reinvestment Act that reduced the conventional lending standards to meet the requirement for banks, as Pozen stated, “to extend loans in proportion to the share of minority populated in their market area” (p. 8). The Reinvestment Act allowed banks to loan to the lower income neighborhoods. These were neighborhoods that can barely keep up the cost of living. This act made it possible for people with little or no money to buy homes that they could not afford or would never had qualify for in the first place.
The Federal created a low-interest rate policy so that it would make homes more affordable for everyone. This also caused an increase demand and an increase in home prices. The low interest rates made adjustable rate loans with low down payment look very good and most importantly it made it affordable. Throughout 2002 and 2004 the federal kept short-term interest rates at a low 2% and less (Pozen, 2010, pg. 138). As stated by Pozen, “federal funds rate slashed from 6.25% to 1.75 %”( p. 10). It was reduced further in 2003 and reached as low as 1% which caused excessive liquidity and created a huge demand for housing (Pozen, 2010, pg. 141).
All these government incentives provided Americans who cannot afford a home to live the American dream of owning one. All of a sudden there policies that allowed Americans to own homes with little or no money down and to top it all off it was affordable month to month. These major policies HUD, Reinvestment Act, and low interest rate Federal loans were like a dream come true to many Americans that quickly turn into a nightmare. The housing market started a downward spin and homeowners scrabbling to savage what little they can. These government incentives were economically poor planning and the recovery from it is still a long way off.
Gwartney, J., Macpherson, D., Stroup, R., & Sobel, R., (13). (2008). Macroeconomics: Private
and Public Choice. Mason, OH. Cengage Learning
Pozen, P. (2010). Too Big to Save? How to fix the U.S. financial system. N.J. Hoboken, N.J. Wiley.